Lehman D&O Risk Prompts Lawsuit

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A shareholder lawsuit accuses an energy company’s directors and officers of not fully revealing the shareholders’ exposure to Lehman Brothers’ credit problems before the investment bank collapsed last week.

The complaint issued by law firm Coughlin Stoia Geller Rudman & Robbins says that following Lehman’s bankruptcy filing last Monday, Constellation Energy’s stock price fell that day to $47.99 per share, which was nearly half of what it was selling for in June.

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At the beginning of last week, Constellation acknowledged Lehman as one of its trading partners but said the firm’s bankruptcy would “not have a material adverse effect on the company or its subsidiaries individually or collectively.” However, that news reportedly did affect its ability to make energy-related trades, and investors questioned the company’s ability to access capital.

On Wednesday, the company said it had reaffirmed its access to a $2 billion credit facility and that it had limited exposure to the credit problems of financial institutions embroiled in the Wall Street turmoil last week. At the same time, Standard and Poor’s warned that it might downgrade its BBB rating for Constellation.

In the meantime, Constellation had put itself out for bid, and by the end of last week, Warren Buffett’s Berkshire Hathaway’s MidAmerican Energy Holding Co. agreed to buy Constellation for $4.7 billion, or $26.50 per share.

The shareholder complaint doesn’t mention the acquisition. It focuses on the claim that the higher stock price earlier this year stemmed from executives’ false statements, which led to the stock’s fall later. The defendants — who include CEO Mayo Shattuck; former CFO E. Follin Smith; and current CFO John Collins — are accused of inflating the company’s financial results through their characterization of depreciation expense (which inflated cash flows) and assumptions used in mark-to-market accounting. Constellation did not immediately respond to CFO.com’s request for comment on the lawsuit.

Kevin Lacroix, a director of Oakbridge Insurance Services who observes securities litigation, refrains from calling this Lehman-related suit the beginning of a trend for the plaintiffs’ bar. However, he writes in his blog, “this lawsuit demonstrates that the reverberations from the most recent phase of the credit crisis are spreading far beyond the high profile financial services companies whose names have dominated recent headlines.”